The Affordable Care Act's (ACA's) Employer Shared Responsibility Payment (ESRP) penalties continue to affect employers with 50 or more full-time employees or the equivalent (FTEs) who do not offer qualifying health coverage to their full-time employees.
For 2027, the IRS has announced updated penalty amounts. Employers with 50 or more full-time employees or the equivalent may face a penalty if at least one employee receives a premium tax credit for purchasing coverage through the Health Insurance Marketplace.
The "A" penalty (sometimes referred to as the sledgehammer penalty) is assessed if the affected employer does not offer minimum essential coverage (MEC) to at least 95% of full-time employees and includes an offer to cover any children of the employee up to age 26 (although not spouses or domestic partners). Note: this penalty applies to all full-time employees (less the first 30), if even one of the affected employees obtains subsidized coverage on an ACA exchange, and even if those full-time employees were offered and received MEC.
The "B" penalty (sometimes referred to as the tack hammer penalty) is assessed if the affected employer offers MEC that is not affordable and minimum value. In 2026, the cost of employee-only coverage cannot exceed 9.96% of the employee's household income to be affordable. Employers are unlikely to know an employee's household income. Therefore, the IRS provides employers with three safe harbors: W-2 Box 1 Wages, Rate of Pay, and Federal Poverty Line (FPL) to make that determination. Affordability is tested using the employee-only monthly cost for the least expensive plan that offers minimum value coverage (dependent coverage is not required to meet that threshold and can be any amount up to the employer's cost). Minimum value means that the coverage, in the aggregate, will pay for 60% or more of the allowed cost of benefits that are expected to be incurred under the plan.
| 2027 Penalty Amounts | 2026 Penalty Amounts | 2014 - Initial Year |
| A Penalty - $3,780 | $3,340 | $2,000 |
| B Penalty - $5,670 | $5,010 | $3,000 |
Note: Amounts shown are annual penalties. The A penalty is generally assessed based on total full-time employees (less the first 30), while the B penalty applies only to full-time employees receiving subsidized coverage on the exchange.
Employers should review their health plan offerings to avoid these increase penalties.
This Legal Update is not intended to be exhaustive, nor should any discussion or opinion be construed as legal advice. Readers should contact legal counsel for legal advice. All rights reserved.